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Edited Transcript of FOXF earnings conference call or presentation 3-Mar-20 9:30pm GMT

Q4 2019 Fox Factory Holding Corp Earnings Call

Scotts Valley Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Fox Factory Holding Corp earnings conference call or presentation Tuesday, March 3, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Haugen

Fox Factory Holding Corp. - VP, General Counsel & Corporate Secretary

* John Blocher

Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller

* Michael C. Dennison

Fox Factory Holding Corp. - CEO & Director

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Conference Call Participants

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* Alexander Rocco Maroccia

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Craig R. Kennison

Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst

* James Vincent Duffy

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Lawrence Scott Solow

CJS Securities, Inc. - MD

* Michael Arlington Swartz

SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst

* Rafe Jason Jadrosich

BofA Merrill Lynch, Research Division - Associate

* Scott Lewis Stember

CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the FOX Factory Holding Corp. Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, David Haugen, General Counsel. Please go ahead.

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David Haugen, Fox Factory Holding Corp. - VP, General Counsel & Corporate Secretary [2]

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Thank you. Good afternoon, and welcome to FOX Factory's Fourth Quarter and Fiscal 2019 Earnings Conference Call. On the call today are Mike Dennison, Chief Executive Officer; and John Blocher, Interim Chief Financial Officer.

By now, everyone should have access to the earnings release, which went out today at approximately 4:05 p.m. Eastern Time. If you've not had a chance to review the release, it's available on the Investor Relations portion of our website at www.ridefox.com. Please note that throughout this call, we will refer to FOX Factory as FOX or the company.

Before we begin, I'd like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown uncertainties, many of which are outside the company's control and can cause future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the company's latest Form 10-Q and in the annual report on Form 10-K filed with the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events or otherwise.

In addition, within our earnings release and in today's prepared remarks, non-GAAP gross margins, non-GAAP operating expenses, non-GAAP income tax, non-GAAP adjusted net income, non-GAAP adjusted earnings per diluted share, adjusted EBITDA and adjusted EBITDA margin are referenced. It is important to note that these are non-GAAP financial measures that we believe are useful metrics that better reflect the performance of our business on an ongoing basis. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures is included in today's press release, which has also been posted on our website.

And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [3]

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Thanks, David. Good afternoon, everyone. We appreciate you joining us on today's call. To start, I will discuss our key business highlights and recap our strong finish to 2019. John will then review our financial results in more detail and discuss our 2020 outlook. After that, we will open the call for your questions.

Turning to our results. We are very pleased with our record fiscal year finish. Both revenue and profitability exceeded our expectations. Our team executed well, and we benefited from continued growth in both our Powered Vehicles and Specialty Sports Group. We remain confident in our ability to consistently generate strong growth across our diversified business model and achieve our long-term targets. Overall, our fourth quarter sales of $186 million increased nearly 19% compared to the fourth quarter last year. Our strong results were driven by the continued success of our Powered Vehicles product lineup, particularly in the OEM channel and in Specialty Sports Group, where our products were well received with a strong sell-through across multiple OEMs. From a profitability perspective, we reported non-GAAP adjusted earnings per diluted share of $0.65, representing an increase of 4% and adjusted EBITDA of $34 million or an increase of 15%.

Focusing on our Powered Vehicles Group. Product sales were up 24.2% compared to the fourth quarter of 2018, and Powered Vehicle product sales were up 33.8% in fiscal 2019 compared to the prior fiscal year. We continue to remain focused on the off-road capable on-road vehicle market and are excited about the prospects with our automotive OEM customers Ford, Toyota and SCA. As I mentioned on our last call, one of our newest platforms is the all-new 2020 Gladiator Mojave, which is designed to take on the extreme desert at high speeds. It was unveiled by Jeep at the Chicago Auto Show last month. This vehicle features 6 FOX suspension components, the most FOX products ever on a production vehicle and is designed with and incorporates 4 FOX 2.5 Internal Bypass shocks. It also includes 2 of our bump stops, which feature an internal floating piston that increases damping performance and bottom out control in the last few inches of travel. We're extremely pleased to have worked with SCA to include our performance-dependent products on its latest vehicle in the Jeep product lineup. In the automotive aftermarket, Tuscany launched the first-ever Harley-Davidson edition GMC pickup truck at the Barrett-Jackson auction on January 11. Tuscany worked closely with Harley-Davidson to create a vehicle that is distinctly Harley. The team drew inspiration from the Harley-Davidson Fat Boy model and included over 65 additional specific components in the model 2020 truck. A launch of note, on the Power Sports OEM side, Honda recently announced 2 new sport side-by-side models for 2021 that feature fast Live Valve technology, the Talon 1000X and Talon 1000R. This was in response to customer requests for a 2-seat model featuring electronic suspension after the launch of the 4-seat version with Live Valve last year, the Talon 1000X-4.

Finally, within PVG, we continue to make excellent progress on our efforts to expand our powered vehicles manufacturing footprint in Georgia. The development of our new facility in Hall County is on track. The first phase of this expansion project is still set to be up and running late in the second quarter of this year.

Now moving on to our Specialty Sports Group. Sales in the fourth quarter of 2019 were up 11.3% compared to the same period in fiscal year 2018. Annual Specialty Sports Group product sales increased 6.3% in fiscal 2019 compared to the prior year, which is in line with our mid- to high single-digit growth targets.

In 2019, many of our FOX Marzocchi, Race Face and Easton Cycling products were acknowledged by racking up consumer and media wins. Here are just a few of the highlights. Our Live Valve technologies interim products took home the Eurobike Gold Award, won the Design & Innovation Award and were named Gear of the Year by Bicycling magazine. FOX was named the #1 fork and shock by the readers of Vital MTB. The Marzocchi Bomber Z2 suspension fork was named Value Product of the Year by Pinkbike and rated as the must-buy product by mountain bike magazine in Germany.

In the BIKE Magazine's Readers Award, Race Face was voted #1 brand in bars and stems for both traditional and e-mountain bikes. Our success is fundamentally due to our innovative product offering, strong demand from our end customers, and our ability to lead markets in both North America and Europe. In Specialty Sports, we continue to perform well against a modest industry demand backdrop. Our model year 2021 products are being well received by our OEMs and athletes and we are optimistic with how our overall spec position is shaping up. Product innovation continues to drive demand by OEMs in the aftermarket. We look forward to executing on our opportunities for growth in 2020 and believe FOX's diversified product offerings will continue to resonate our customers, demonstrating our commitment to product innovation and growth of FOX brands in both existing and new categories.

While our core business remains strong, we are mindful of certain external factors that include the coronavirus that may have an impact on our business. COVID-19 is, first and foremost, a tragic illness and our thoughts are with those impacted around the world. We are actively monitoring the potential impact of the virus on our employees, our supply chain and end-customer demand. And while we have included the likely impact of the virus in our first quarter guidance as well as the minimal impact on the guidance for the balance of the year, we caution that this virus is a fluid situation where implications of long-term demand or supply chain disruptions cannot be fully quantified today.

As previously announced on February 12, 2020, we signed a definitive agreement to acquire 100% of the issued and outstanding capital stock of SCA from Southern Rocky Holdings. We believe this acquisition is complementary to our Tuscany business, expanding our North American footprint for manufacturing, which can provide incremental efficiencies and capacity utilization and allows us to be in closer proximity to our customers. This acquisition broadens and diversifies our product offerings across incremental truck and SUV brands in a growing segment of the automotive industry. The combination of these benefits creates a leading platform with solid runway, with continued growth in our Powered Vehicles business. In addition, it will significantly expand our automotive dealer network. We look forward to working with their strong team. We remain on track to close the transaction by the end of the first quarter of fiscal 2020, subject to customary closing conditions. And as we discussed on our call to review the acquisition, we expect SCA to be accretive to FOX's fiscal 2020 financial results.

In summary, we had a great end to 2019 and begin 2020 with excitement of our opportunities to win at FOX. We appreciate the strong efforts of our team as we continue to deliver differentiated products to our passionate customer base, which reinforces the value of our brands. We plan to build upon our existing accomplishments to generate long-term sustainable growth and value for our shareholders.

And with that, I'll turn the call over to John.

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [4]

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Thanks, Mike. Good afternoon, everyone. I'll go over our fourth quarter results then speak to our 2020 guidance. Sales in the fourth quarter of 2019 were $185.9 million, an increase of 18.5% versus sales of $156.8 million in the fourth quarter of 2018. Gross margin was 32.1% in the fourth quarter of 2019, a 40 basis point decrease from 32.5% in Q4 '18. The decrease in margin was primarily due to the continued shift in customer and product mix at our larger North American OEM represented a higher proportion of sales. In addition, we continue to experience manufacturing and supply chain inefficiencies, which negatively impacted gross margin.

Total operating expenses were $33.5 million or 18% of sales in the fourth quarter of 2019 compared to $28.1 million or 17.9% of sales in the fourth quarter of last year. The increase in operating expenses on a dollar basis was primarily due to higher personnel costs as we invest in product innovation, operating costs related to RideTech and increases in facilities and various other administrative expenses to support the growth of the business. Non-GAAP operating expenses as a percentage of sales were 16.3% compared to 16.0% in Q4 '18.

Focusing on expenses in more detail. Sales and marketing increased $1.5 million due to our RideTech subsidiary, personnel costs and various other events and promotional-related activities. R&D was up $1.5 million, primarily due to increased personnel investments to support new product innovation and costs associated with RideTech. As we have consistently stated, the timing of both R&D and promotional expenses often changes between quarters and years depending on a number of factors, including product launch cycles. Our general and administrative expenses in the fourth quarter of 2019 were $12.9 million compared to $10.6 million in Q4 '18. The change was primarily due to facility and various other administrative expenses, personnel costs and costs associated with RideTech. For the fourth quarter of 2019, our effective tax rate was 10%. This tax rate is lower than our mid- to long-term expected tax rate, primarily due to certain nonrecurring benefits in 2019. Adjusted EBITDA was $34.4 million for the fourth quarter of 2019 compared to $29.8 million in the same quarter last year. Adjusted EBITDA margin was 18.5% compared to 19.0% in Q4 '18. The lower EBITDA margin is primarily due to the change in gross margin, highlighted in my earlier comments and the increase in non-GAAP operating expenses due to timing. On a GAAP basis, net income attributable to FOX in the fourth quarter of 2019 was $22.5 million or $0.58 per diluted share compared to $20.1 million or $0.52 per diluted share in the prior year period. Non-GAAP adjusted net income was $25.4 million, an increase of $2.9 million compared to $22.5 million in the fourth quarter of the prior year period. Non-GAAP adjusted earnings per diluted share in the fourth quarter of 2019 was $0.65 compared to $0.58 in the fourth quarter of 2018.

Now focusing on our balance sheet. As of January 3, 2020, we had cash on hand of $43.7 million. Total debt outstanding was $68 million compared to $59.4 million at the end of 2018. Inventory was $128.5 million compared to $107.1 million at the end of 2018. Accounts receivable was $91.6 million compared to $78.9 million at the end of '18. And accounts payable was $55.1 million, flat compared to the end of 2018. The changes in working capital accounts are primarily attributable to the growth of our business and the impact from our RideTech acquisition. Additionally, our net property, plant and equipment increased to $108.4 million as of January 3, 2020, compared to $64.8 million at the end of 2018. The increase was primarily driven by investments in our new PVG manufacturing facility in Georgia, which is expected to begin production in mid-2020.

Now turning to our outlook. For the first quarter of 2020, we expect sales in the range of $182 million to $190 million and non-GAAP adjusted earnings per diluted share in the range of $0.55 to $0.60. For fiscal year 2020, we expect sales in the range of $881 million to $906 million and non-GAAP adjusted earnings per diluted share in the range of $3 to $3.10. As previously announced on February 12, FOX signed a definitive agreement to acquire SCA Performance Holdings. Our fiscal 2020 guidance includes approximately 9 months of SCA's expected results. We expect full year 2020 adjusted EBITDA margin to be between 19.7% and 20.5%. We expect non-GAAP operating expenses to be consistent with our stated long-term range of 16% to 16.5% of sales on a full year basis and expect some fluctuations between quarters. We continue to expect production in the new Georgia facility to begin in the second quarter and ramp throughout the balance of the year. We expect some inefficiencies to continue as well as additional duplicative costs during this ramp in 2020. We expect CapEx for 2020 to be in the range of 6% to 7% of sales, above our long-term CapEx rate of 3% to 4%, primarily due to the Georgia facility, which we anticipate to be largely complete in fiscal 2020. Our full year guidance assumes an annual tax rate of 15% to 19%, which is consistent with our mid- to long-term expected tax rate. Due to timing of various tax items, we expect Q1 to be at or slightly below the low end of this range. We continue to expect some quarterly fluctuation in tax rates to occur during the year due to the timing of certain variables, such as stock option exercises and stock prices that are difficult to predict.

Finally, I'd also point out that our guidance for the first quarter reflects our current view of known impacts from the coronavirus on our supply chain as they stand today, and we're actively monitoring the situation. However, given the dynamic and evolving nature of the situation, we cannot accurately predict potential future impacts on our supply chain or that of our customers or end users. I would also like to note that we are not providing guidance on GAAP EPS as it cannot be provided without unreasonable efforts due to the difficulty of accurately predicting these elements necessary to provide such guidance and reconciliation.

I would like to now turn the call back over to Mike.

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [5]

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Thanks, John. We would now like to open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first questions is from Mike Swartz of SunTrust Robinson Humphrey.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [2]

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Just starting on maybe some of the commentary around the new Georgia facility and just the timing of that. Doesn't sound like anything has changed since the last time you've talked publicly. I guess, just what everyone's trying to understand better is just the cadence of some of the inefficiencies and costs throughout the year associated with that project. So maybe give us a little sense of how that would impact gross margin as we work through the year?

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [3]

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Sure. So here in Q1, we've already started a little bit of that activity. So there will be some of that activity in Q1. It tends to ramp a little bit in Q2 and Q3 as we start to -- you bring on people and inventory, the training -- duplicative training costs and things of that nature. I think it kind of levels off there in Q3 if you kind of look -- think of it that way as we start to get efficiency. And Mike, one thing I would comment for you also, as we talked about in the past is that as we get into the kind of back half of the year and production starts up in Georgia, we are expecting to get some partially offsetting operational efficiencies in our West Coast operations from -- as a result of that transition. So there'll be a little bit of balancing on it. I think you'll get some partial offset about that, but did I help you give you color on how that might play out in the year?

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [4]

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Yes. No, that's exactly what I was looking for. And another question. Just in terms of guidance, the numbers you gave us from a couple of weeks back with the SCA acquisition, I presume, wouldn't have changed in terms of the 9-month impact?

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [5]

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No, no. It's consistent.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [6]

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Okay. I think that's...

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [7]

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I would say, Mike, also the -- Michael, that we're expecting to close late in this quarter, as we've talked about. It could change a week or 2 due to some of that -- who knows how that will go. Still a little bit TBD, but no, it's still consistent.

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Operator [8]

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The next question is from Craig Kennison of Robert W. Baird & Company.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [9]

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I wanted to touch on the -- this coronavirus, hard to get away from that. To what extent does your supply chain get affected at all? Maybe just add a little more color. Curious if you have component suppliers that have shut down or had any temporary shutdown? And then whether any of your OEM customers have struggled to stay open because other of their suppliers are not operational, even if you may be?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [10]

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Yes, let me try and tackle that, Craig. So what we did, as we saw this kind of become a real global issue, we've put together a team of folks from both business and supply chain to understand all the way down to a component level where we thought our supply chain might be affected. We do those reviews weekly. And from where we sit today, with the information we have, I'd say the impact on our supply chain is very minimal. A few things moved out slightly. It was in the quarter, but nothing that would be a material change from a supply chain perspective. That's what we know today, and what's going to play that out as things change globally, of course, with this virus. On the end-customer demand, so far, we've got strong signals from all of our customers that things continue if not as normal as close to normal as you can be in these circumstances. So we feel pretty good about it. Again, I think as this virus spreads globally, there could be some implications of that. But as of where we sit today, we think it's pretty minimal. It's in our guidance for both the quarter and the year. And I think it's imperative for us just to stay very focused on it and very conscious of the potential implications.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [11]

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And then a few quarters back, you acquired RideTech. I'm wondering if you would provide an update on how that integration is going. And what opportunities have been developed since you've acquired the company?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [12]

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Yes, RideTech has done very well. That was our launch into the street performance as a category. We fully integrated that business towards the back half of last year. It's functioning extremely well. When I say we fully integrated, there's still a few things that we need to do like Oracle implementation, et cetera. But from a business operations perspective, we're fully integrated. So we think that's a long growth curve as we get into street performance. We think RideTech is a key piece of it. And it's performed at or above our expectations since the acquisition. So yes, we feel great about it.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [13]

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And finally, shifting to cash flow. You mentioned the CapEx being elevated this year. What would that vigor return to in 2021? And also, with respect to working capital, what kind of working capital draw should we expect in 2020?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [14]

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I'll take the first half, and let John have the second one. So we believe CapEx is a function of 2021, it goes back towards more normal range of 3% to 4%. We think once we get through Georgia, again, envision Georgia gives us enough expansion that we're in great shape for a number of years. And our CapEx should come back to the 3% to 4% range.

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [15]

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Yes, Craig. On the working capital, I'd say, in the near term, we're going to be putting inventory in additional -- in front of the Georgia factory. So I think it's -- there's going to be an additional need for working capital. Also with the acquisition of SCA, we've got those finance vehicles on it. I think it kind of goes up a little bit then levels off. And I think longer term, what we're expecting out of that Georgia facility, I don't want to use the word significant, but we're definitely expecting some improvement on the inventory, the working capital of kind of at that factory because that's a much more elegantly designed and efficiently designed factory than our current supply chain.

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Operator [16]

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The next question is from Scott Stember of CL King.

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Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [17]

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Just looking out, I appreciate the fact -- and thanks for the information about what you're seeing right now from the coronavirus, but maybe just give us an indication of how reliant you are on parts from China, whether it's subcomponents or fully designed components? Just trying to get a sense of what we should be looking for in the event that things do get worse as the year progresses.

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [18]

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Yes. China is a bigger supply chain around aluminum components, aluminum parts, things like bearings. It's not an enormous list of different components and most of those factories, as I said earlier, are functioning, and we're getting the inventory we need. So no significant issue. We do also get wheels from China for our up-fitting business. So we're tracking that, and we're okay there, too. But on the Powered Vehicles side, it's really kind of a wheels supply chain. On the bike side, it's more aluminum components, bearings, stuff like that.

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Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [19]

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And on the demand side in China, can you maybe just touch on that?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [20]

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Yes. We don't sell much into China. I think China, John, correct me if I'm wrong, China is about 1% of our revenue.

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [21]

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Yes. Very small.

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [22]

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So it's not -- we don't have a demand issue there, for sure.

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Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [23]

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Got it. And just looking at the SCA acquisition and just trying, for modeling purposes, from an interest expense standpoint and a balance sheet standpoint, just remind us, of where you expect the leverage to be when the deal closes. Where you expect it to be, I don't know, with the 12 to 18 months? And maybe just give us an indication of where -- what kind of expense -- interest expense we should be looking at on a quarterly basis, at least initially?

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [24]

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Sure. Let me take that one. So the entire -- the deal was financed along with the additional working capital. Also this quarter, as we talked about earlier on CapEx, we've got a high CapEx first half of this year relative to Georgia expansion going on. And then some additional working capital increases. So I'm expecting somewhere around the 2.5x EBITDA trailing coming out of the quarter here. And then I think, over the next 12 months -- 12 to 18 months, we get that down. I don't want to give a number, but certainly, our comfort zone is more in the 1 to 2 range. So I think we'll kind of get that down over the coming 6, 12, 18 months type of thing.

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Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [25]

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Got it. And then on the interest expense line?

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [26]

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I would just assume market. I mean, I've given you the -- we've given you the value of the transaction. You've got some good modeling CapEx and that sort of thing and run it. So you just assume market rate type of things, which is the best way to kind of estimate that interest expense.

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Operator [27]

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That next question is from Larry Solow of CJS Securities.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [28]

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Just a couple of follow-ups. On the Specialty Sports, excuse me, pretty nice growth in Q4, and you sort of rebounded to the lower end of your long-term range. I know you don't necessarily guide by each segment. But if I'm not mistaken, a bunch of new product platforms coming out in 2020. A good decent amount more than they were in '19. Any thoughts on that and sort of is the outlook -- on a general speaking terms, is that sort of in the normal range? Or...

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [29]

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Yes. I would say the outlook is in the normal range. We're still going to guide that business in 2020 in the mid- to high single digits. But we feel great about the product launches that we're doing this year for -- actually, for model 2021 bikes, but those bikes come out in 2020. So we feel great about that. So we're really looking forward to a good year with the SSG business.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [30]

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And could you give us any color on some of those new platforms, again, from a high level maybe or...

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [31]

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Yes, the ones that we've talked about in the past were all on forks and suspension systems. We haven't given a lot of color on the components side of our business. We see some good news happening there, too. We won't actually announce which bikes were on because that kind of front runs our customers. So we'll let those come out and get introduced by the OEMs, but a lot of those new platforms, like I said, are on suspension and core products.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [32]

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Okay. And then on the margin outlook. It sounds like gross margin, there'll still be some inefficiencies at least through the first half of the year? And maybe, I guess, full year gross margin may be down a little bit, but you're actually guiding to a little bit higher on the EBITDA side. So do you pick up a little bit on operating leverage, operating efficiencies? Or how should we look at that in '20? And then can you sort of help us -- yes, go ahead. And then I got a follow-up to that.

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [33]

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Yes, we get a little bit -- just don't forget, we get a little bit of extra lift on the SCA. And I think their EBITDA margin were tad bit above legacy FOX. Keep that in mind.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [34]

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Okay. That certainly helps you a little bit. Okay. Yes, that's the primary driver you think or...

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [35]

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Yes.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [36]

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Okay. And then how about as we look out to '21 and beyond? So certainly, '20 seems like still another transition year. But clearly, we expect some benefit -- bounce back to where you were, and then hopefully, you get some pretty good benefit as you consolidate and move a lot of your stuff into newer capacity and outside of a higher labor area on the West Coast there. Some of that comes out. I don't know if -- what -- if you can quantify the impact, but when you moved to Taiwan on the bike side a few years ago, it was a multi 100 -- several hundred bps over a several year period, but how should we look at it on the Power Sports side -- powered vehicle side?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [37]

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I think there are absolutely opportunities for efficiencies in manufacturing and supply chain. I would say it's even greater than just the people impact. Clearly, access to labor, access to talent has -- is going to be easier for us in Georgia than it is where we're at in California. But more importantly, the supply chain, that is vertically integrated. Most of it housed in the buildings. So within one building versus within suppliers and hubs and nodes all over the western part of the United States. So it's just a much more efficient supply chain where you can get machining, anodizing and manufacturing all in the same building. So that is where we're going to stand to gain significant opportunity.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [38]

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And would you start expecting to see -- should we start expecting those, obviously, not all at once, but in '21 start moving up in the right direction? On the margin side.

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [39]

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Yes, I think so. I think 2020 is a year where we're in transition. We're going to get, as John mentioned before, some efficiencies in California while we bring up Georgia. But you're really going to see the weight of the value of Georgia start to hit us in 2021.

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [40]

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I would caution you that with the move from California to Taiwan, that was a significantly different cost structure than the move to California, Georgia. So I'd also -- yes, yes. Yes, I don't want to think that there's (inaudible)

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Lawrence Scott Solow, CJS Securities, Inc. - MD [41]

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But hopefully, not quite to that magnitude, but I'm hopeful that some -- obviously, you'll get some similar kind of benefits but not quantified. Now I realize not as great. I just -- last question just on the commercial tractor-trailer. Any updates on that? And are you including any sales in your guidance for 2020?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [42]

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We've kept the guidance very small on commercial for 2020, just because it's going to come into the Georgia solution later in the back half of the year or the very end of the year. It won't be the first thing that we move. So -- and Georgia is really required to get to the scale and volume that we need to support our customer base. So we've consciously kept that as a very small component of our 2020 guidance.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [43]

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Okay. So hopefully, by '21 and beyond, hopefully, we'll -- that will start seeing a little bit more material effect in that. Absolutely. Great.

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Operator [44]

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The next question is from Jim Duffy of Stifel.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [45]

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Just to start, just given sort of the K, it looks like Ford was an 11% customer in '19. In the past, you guys have disclosed automotive percent of the mix, maybe it's in there, and I haven't seen it yet. But can you speak to where auto stands as a percent of the mix for 2019? And maybe...

Go ahead, John.

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [46]

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Yes, let me take this one and then maybe, Mike can -- when we did that, we've done that once so far, and we kind of guided that we were not going to be doing that on a regular basis. That it's a periodic basis, we're going to be doing that. So I don't think we've disclosed that. But you're right, Ford was an 11% in the year for us.

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [47]

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Yes. For me, Ford was great for us in 2019 with the Ranger Raptor and the Raptor products. There was just pretty significant volume, which was fantastic to see. And of course, as we've talked about in the past, that's a little bit of why that frictional cost in California is currently -- we just exceeded our greatest forecast expectations with that business.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [48]

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Great. Then shifting gears, especially Sports. Can you talk about the mix of business you're seeing between e-bikes and traditional bikes? I'm curious, is e-bikes driving all the growth? Or are you actually seeing growth in the traditional bike business as well?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [49]

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We're seeing it in the traditional bike business as well on the premium end of that space and we've seen really nice uplift. E-bikes are still emerging in that category because as you know initially e-bikes really weren't much for the mountain bike category. They are more city bikes and things like that. As that transitions to more of a mountain bike and a premium mountain bike at that, we think that's a phenomenal opportunity for us. So we're really focused on that in 2020 and beyond. But historically, a lot of our growth has come from the traditional space.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [50]

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Okay. And some of your key platform providers are coming out with high-profile e-bikes this year. Is that a meaningful driver to the category in your business?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [51]

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I think e-bikes extend their demographic that you can sell a mountain bike into and a premium mountain bike into. I believe that it allows people to do more biking and mountain biking than they would have otherwise. And I think for a long-term basis, it's a real significant lever for us.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [52]

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Okay. Last one for me. Just tying up loose ends. 2019 had a 53rd week, John. How should we think about that as modeling for the fourth quarter? Any way to size that contribution?

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [53]

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For the last quarter of '19, you mean?

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [54]

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Yes.

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [55]

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Yes, it's interesting. We're going into it, we were thinking the holidays played up. We're going to -- the extra days were going to be around holidays and things like that. I would tell you, we think it helped us a little bit with where we came in. I don't want to give you a number, but it did help us a little bit. I wouldn't say it was all -- it was -- the entire thing was relative to that. I think the strength of the business was also fairly strong. We probably picked up a little bit here because of the extra couple of days.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [56]

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So not big enough to really think about as we model for fourth quarter of '20?

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [57]

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Right. Correct.

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Operator [58]

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The next question is from Alex Maroccia of Berenberg.

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Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [59]

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So it looks like Powered Vehicles are now 60% of the business. And they seem to be on track to hit around 65% by the end of this year. Could you just remind us how dilutive some of the contracts are to group margins? And what you think you could do in the long-term for adjusted EBITDA margins once the Georgia plant's online?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [60]

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Yes. So a couple of things. I think your numbers are right relative to the percentages of Powered Vehicles versus SSG. We don't talk about the contracts specifically. We believe we've got contracts that match our type of business. We're not a commodity supplier. We're not a broad line supplier to these companies. We sell a branded product. It's a premium product. In terms of where we go with margins, Georgia will help us significantly. We have not actually qualified what those numbers are, though, relative to Powered Vehicles. Although we've said they are meaningful. And I think for us, aftermarket is always a good balance in the equation. So even in Powered Vehicles, we have a significant aftermarket business, which has higher margins typically than OEM business. So we're balancing that for a number of different ways, and we will stay focused on that balance because we think it's healthy for the overall margins of the business.

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [61]

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Yes, John, I'd also kind of follow on to that is the SCA acquisition that we did, they have an aftermarket channel. And so their margins tend to be a little bit higher as well. So that adds to that PVG raising.

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Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [62]

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Okay, makes sense. And I know you're not going to give specific contract details, but we are getting close to the end of life cycles for the generation 2 Ford Raptor. It's an important part of the business as -- that you gave the 11% number. Can you just give us any sense of how pricing at the end of the current life cycle may have affected margins in '19? And what we could expect in '20?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [63]

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A couple of things are happening in '20. And I'll tie you back to actually the Mojave deal that we've struck with SCA. On that vehicle, we actually have 6 products. So when you think about our ability to sell revenue into a per vehicle basis, having an additional 50% components on the vehicle helps us a lot. So we're increasing our value per vehicle on 2 fronts, really on the premium product category with Live Valve and things like that as well as the number of components. So we -- that's how we kind of attack it. And we think with Raptor, their next-generation Raptor and some of the new products coming out from both SCA and Ford and others. And I think we're looking pretty positive about the long-term growth aspects of it, both margin and revenue.

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Operator [64]

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(Operator Instructions) The next question is from Rafe Jadrosich of Bank of America Merrill Lynch.

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [65]

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I just want to follow up on the (inaudible). Can you just discuss more like what you're seeing overall in mountain bike? And then how you feel about your market share transfer?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [66]

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Rafe, you were breaking up a little bit, so I'm not sure I caught that completely. Something on mountain bikes and market share? Can you just repeat that last?

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [67]

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Yes. I think you mentioned that when you talked about the overall industry that you're seeing modest growth. Can you talk about your overall market share trend within the industry? And then, yes, the overall growth trend.

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [68]

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Yes. We think in mountain bike, it tends to still remain kind of a modest growth business. We've talked about it kind of tracking to GDP. Of course, our growth is significantly higher than that. That is a function of share, and that's a function of new products as well. So we're really comfortable with -- our spec share in 2019 was great. In 2020, it looks to be as good or better. And again, when you get down to a market where you're 1 of 2 players on the premium end of the business, maybe it's kind of a give and take each year to a certain extent, but we continue to win awards and win races. So I think that tells you that we're holding our own and probably doing a little bit better than our own, if you will.

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [69]

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And do you see additional category opportunity in mountain bikes that you're not in a major area?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [70]

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We do. There's a couple of things that we think are interesting for us. One is the e-bike categories opened up a notion of needing a lighter, more functional fork and shock setup than the traditional bikes. It's a little bit different. We think the gravel bike category is interesting for us, not necessarily a huge category, but one that's growing and one that we think could be interesting for a damping system of some kind. And of course, we got a free ride business where Marzocchi really plays has been great for us. So we think those are good categories to grow. And then on the Race Face/Easton side, our carbon wheels are going in both mountain banks and road bikes and that expands us into some spaces that we think we would grow, too. So we think there's a lot there. We really love that business. And I know it's not the mark, the business as an industry doesn't grow as fast as others. But we're -- the way we feel about it, we're #1 of 2 in those spaces, and we like that positioning.

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [71]

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And then I want to just follow up on the SCA acquisition or I guess more of your acquisition strategy going forward? SCA was definitely larger than prior acquisitions you've made, pushed the leverage up a little bit higher. Kind of going forward, can you talk about, after you delever, like, what the acquisition strategy is? Like, what are the characteristics in terms of size, target multiple, categories that you'll be looking for additional M&A?

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [72]

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Yes. Just because we did a large acquisition doesn't mean we wouldn't do a small one. So when we find a technology or a business that opens a door for us or gives us the capability we didn't previously have, we're fine to do smaller-sized acquisitions, RideTech being a good example of that. At the same time, we have a limited bandwidth for a management team. So buying small companies takes about as much work as buying a big company. Sometimes buying a big company, you get a fantastic management team with the acquisition, which is the case in SCA. And those are much easier to integrate. Those are much easier to bring into the family and run as a business. So we like those bigger acquisitions. They have a bigger impact on our business faster. And as we grow, it's kind of the law of big numbers. So we need to do bigger deals. In terms of valuations, it really depends on the deal. We like to get things at a value. So we like to buy assets that are not premium priced. At the same time, depending on the market and the space we're trying to acquire into, sometimes you pay more of a market price for a target. So we're not afraid of it, but it really has to meet the strategic direction of the company and where we're going. We want to stay completely on track with who we are, how we run our business and our culture. So we use those as big filters to make sure that when we acquire somebody that we're getting the right team, the right company with the right product that matches what we do. So that's kind of the lens we use. Hopefully, that helps.

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [73]

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Yes, that's really helpful. And sorry, just one more I wanted to ask on the guidance quickly. In terms of the guidance for 2020, it looks like the organic growth is very strong in the first quarter and then sort of moderate in quarters 2 through 4. Is there anything specific that's driving that on an organic basis or is that conservatism? Or just -- can you just help us understand the cadence throughout the year for the top line growth?

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John Blocher, Fox Factory Holding Corp. - Interim CFO, VP & Corporate Controller [74]

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Yes, Rafe. Let me -- John, let me take that one. First of all, I'd remind you that we acquired RideTech in the second quarter of last year. So it's not -- it wasn't in the Q1. So that's part of that growth that see -- you're calling organic there. Additionally, I think there's a little bit of seasonality this year within our PVG side, specifically, especially vehicles, some of the platform changes and timing of some of those things, it's kind of a shifting around from, probably from Q2 into Q1, it's a little bit. So the combination of those 2 things is why you see a little bit of a little bit more accelerated Q1 kind of going down to kind of the more normalized rate in the back half. So I think that's what's going on.

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Operator [75]

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This concludes the question-and-answer session. I will now turn the call over to Mike Dennison for closing remarks.

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Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [76]

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Thank you. We appreciate your participation and questions on today's call. Thank you for your interest in FOX. We look forward to speaking with you when we report our 2020 first quarter. Have a good evening.

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Operator [77]

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This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.